On August 7, 2012, hearings in the landmark Canadian misleading advertising case Commissioner of Competition v. Rogers Communications Inc. began.

The case, the first constitutional test of increased “administrative monetary penalties” or “AMPs” under the Competition Act (the “Act”) for misleading advertising, promises to be a bit of a battle between the Competition Bureau (the “Bureau”) and Rogers in relation to a few key aspects of Canadian advertising law.

The case relates to certain performance claims made by Rogers in connection with its new cell phone brand Chatr, the effectiveness of disclaimers (like other recent high-profile Canadian advertising cases) and, perhaps the issue most likely to capture public attention, whether the potentially significant civil penalties now possible for misleading advertising are constitutional.

The Bureau is principally taking aim at two claims made by Rogers: that its (at the time) new Chatr cell phone brand had “fewer dropped calls than new wireless carriers” and that customers had “no worries about dropped calls”. According to the Bureau these claims, made to compete with new wireless entrants Mobilicity, Public Mobile and Wind Mobile, were either literally false in some cases (in markets where new entrant cell phone companies’ dropped call rates were superior to Rogers) or, where true, misleading (by conveying the general impression of appreciably lower dropped call rates, when any differences were in reality “imperceptible” to consumers).

The Bureau has also taken the position that certain disclaimers used by Rogers were ineffective in altering the general impression of its performance claims, including the view that some technical statements made by Rogers in disclaimers would be meaningless to the average consumer. For example, some Rogers disclaimers included statements such as: “Based on: cell site density; quality of indoor and underground reception; and seamless call transition when moving out of zone”.

Rogers in turn has challenged the appropriate data and methodology for its performance claims and is making constitutional challenges to the performance claim provision of the Act (based on freedom of expression arguments under the Charter) and the significant size of AMPs that may be imposed now under the Act (up to $10 million). In particular, Rogers argues that the significant AMPs for misleading advertising, which can now following 2009 amendments to the Act, also be imposed for abuse of dominance, are criminal in nature, constitute penal consequences and therefore should be afforded procedural safeguards of Canadian criminal law process.

Misleading Advertising Under the Competition Act

Under the Act, misleading advertising can be challenged under the “general” civil or criminal misleading advertising provisions (sections 52 or 74.01), under a stand-alone performance claims provision (paragraph 74.01(1)(b)) where a claim involves the performance of a product or, depending on the type of claim, under a variety of other provisions that regulate specific types of advertising and marketing activities (including promotional contests, bait and switch sales, sales above advertised price, pyramid selling schemes, multi-level marketing, etc.).

Under the general misleading advertising provisions of the Act, a claim can be found to be misleading if it is either literally false or misleading. In this regard, the “general impression” is relevant for determining whether a claim is misleading. The “general impression” test can apply where, for example, a disclaimer is ineffective in altering the overall impression of a primary “headline” advertising claim, where two literally true claims are made but, when associated, an overall misleading impression is created, or when material information is omitted from an advertisement – for example, additional pricing, material conditions or limitations, etc.

Under the performance claims provision of the Act, advertisers must have conducted so-called “adequate and proper testing” for performance claims before they are made. While challenges to performance claims are not new – the Bureau has challenged a variety of types of performance claims over the past few years, including in relation to fuel saving devices, hot tubs and spas and recently certain weight loss performance claims in relation to a Nivea skin cream – cases under the performance claims provision have been rather sparse (although there has been some limited consideration by the Competition Tribunal of relevant factors to consider whether testing is “adequate and proper”).

A Few Other Recent High-profile Cases

The Rogers case is the most recent in a series of high-profile Canadian misleading advertising cases over the past several years that have included:

Bell (Price Claims and Disclaimers)

This was a “general impression” and disclaimer case. In this case, the Bureau took the position that advertised prices for some of Bell’s services, including home phone, Internet, satellite TV and wireless services, were not available and that additional mandatory fees were hidden in fine-print disclaimers. The case was settled last year with Bell agreeing to pay a $10 million AMP and entering into a consent agreement.

Nivea (Performance Claims and General Impression)

On September 7, 2011, the Bureau announced a settlement with Nivea’s Canadian distributor, Beiersdorf Canada Inc., relating to allegedly false or misleading performance claims made in relation to a Nivea skin cream. The Bureau took issue in this case with claims suggesting in advertising that regular use of NIVEA My Silhouette skin cream could slim and reshape the body, reducing up to three centimeters on targeted areas. The Bureau took the position that the general impression of such claims was misleading and that related performance claims were not based on adequate and proper testing.

In this regard, advertising can violate the general misleading advertising provisions of the Act (sections 52 and 74.01(1)(a)) where claims are either literally false or the “general impression” of a claim is misleading. Under a standalone performance claims provision (paragraph 74.01(1)(b), advertisers must have conducted “adequate and proper testing” for performance claims for products or services before they are made.

While performance claims are not prohibited, any product/service testing must be conducted (and data obtained) before a claim is made and the onus, if challenged, is on the person making the claim to verify the performance. The Bureau has challenged performance claims in a wide variety of industries over the years, including in relation to weight loss products (diet patches, skin care cream, sauna belts, weight loss devices and natural products, etc.), clothing (alleged therapeutic benefits of some types of clothing), fuel saving devices, chimney cleaning products, UV ray protection, anticorrosion devices, disease cures (e.g., cancer, AIDS, etc.) and the therapeutic benefits of tanning.

Under the consent agreement negotiated with the Bureau, Beiersdorf agreed to refund Canadian customers, remove the product from Canadian shelves and pay an AMP of $300,000. The Bureau also took later enforcement action to ensure that Beiersdorf complied with its consent agreement (in particular, responding to later claims by the company that its claims were in fact supported by independent research, which according to the Bureau was false).

This case is a reminder that the Act contains a standalone performance claims provision, which requires “adequate and proper testing” in advance of performance claims (e.g., claims relating to the speed, efficiency or other performance of a product or service). The Nivea case is also a recent example of the Bureau’s increased desire to ensure that consent agreements (i.e., settlements) are complied with.

Richard v. Time (General Impression and Disclaimers)

In Richard v. Time Inc., a Quebec resident received a prize mail-out in connection with marketing for magazine subscriptions, which led him to believe he had won more than $800,000.00. The mail-out stated that he had “WON $833,337.00!”, when in fact small print disclaimers disclosed that only a chance to win was being offered.

The recipient returned the mail-out, subscribed to Time and later requested his prize. When he was told he had not won, but was merely eligible to participate in a sweepstakes, he sued under the Quebec Consumer Protection Act (“QCPA”). While successful at trial, the Court of Appeal reversed and the plaintiff appealed to the Supreme Court of Canada.

On appeal, the Supreme Court considered the standard for the “general impression” test for misleading advertising under the QCPA. In this regard, advertising can be false or misleading, under both consumer protection legislation and the federal Competition Act, where a claim is literally false or the “general impression” is misleading. This “general impression” test can apply in situations where, for example, a disclaimer is ineffective in altering the misleading impression of a “headline” advertising claim, two literally true claims are made but, when associated together, an overall misleading impression is created, or material information is omitted from advertising (e.g., additional pricing, material conditions and limitations, etc.).

In Time, the Court held that the relevant consumer for the general impression test under the QCPA was a “credulous and inexperienced” consumer. Accordingly, courts should view the average consumer as “someone that is not particularly experienced at detecting the falsehoods or subtleties found in commercial representations.” This is both a lower standard than held by the Court of Appeal in this case and other cases decided under the Competition Act, where courts have generally held that the relevant consumer should be an “average consumer”.

On the facts of this case, the Court held that the general impression of the prize mail-out was that the grand prize had been won, which was misleading, and awarded compensatory and punitive damages to the plaintiff. The Court also confirmed that in considering whether an advertisement is misleading the entire context, including layout and how text is displayed, must be considered and that fine print disclaimers in this case “riddled with misleading representations” failed to cure the otherwise misleading grand prize award claim. According to the Court, the prize mail-out’s “strange collection of affirmations and restrictions [was] not clear or intelligible enough to dispel the general impression conveyed by the [grand prize claim].”

This case is significant because, although decided under the QCPA, the Supreme Court adopted a lower standard for the “general impression test” for misleading advertising (i.e., a “credulous and inexperienced” consumer) than previously held under the Competition Act. This has raised the question as to whether other Canadian courts will adopt the same test, in which case advertisers may need to prepare advertising with more care and also be more explicit and clear to clearly communicate to unsophisticated consumers. The case is also noteworthy as a reminder that fine print disclaimers, particularly those that are themselves confusing or misleading, may not necessarily cure otherwise misleading “headline” or “banner” main claims and that courts will consider the context and impression of an overall advertisement in deciding whether advertising is misleading.

Yellow Page Marketing (Misleading Business Claims and Disclaimers)

In the Yellow Page Marketing case, a group of companies and individuals sent faxes that were designed to lead recipients to believe that they were merely confirming company information in an online directory with the legitimate Yellow Pages Group (“YPG”). In fact the companies, which used names and logos resembling the YPG, were unrelated to the YPG and fine print disclaimers disclosed that recipients were entering into new two-year contracts for online directory listings with significant fees.

The Ontario Superior Court reviewed the relevant law under the general civil misleading advertising provisions of the Competition Act (section 74.01), including in relation to claims to promote a business interest, materiality and disclaimers, holding that the faxes were misleading, material and that fine print disclaimers failed to cure otherwise misleading claims.

The Court issued a declaration that the defendants made materially false or misleading representations, issued a ten-year prohibition order and ordered more than $9 million in administrative monetary penalties (including more than $1 million against three individuals) and restitution to Canadian consumers.

This recent case is significant for several reasons. First, the case is a reminder that the general misleading advertising provisions of the Competition Act apply to false or misleading claims relating to products (i.e., goods or services) or “any business interest” generally. In this regard, the Court also held that the phrase “business interest” should be given a wide meaning, which included in this case collecting money and threats to collect money.

Second, the Court reiterated that an advertising claim must not only be false or misleading, but also material, which it held, citing Canada (Commissioner of Competition) v. Sears Canada, [2005] CCTD No. 1 (Comp. Trib.), means “important or pertinent or germane or essential to the [claim]”. The Court held that the claims in this case were material because they were intended to lead recipients to believe the faxes were from the YPG, with most complainants saying that they would have never ordered the service had they known the senders were unaffiliated with the YPG.

Third, the Court was critical of fine print disclaimers used by the companies, finding that they failed to clarify that the faxes were not sent by the YPG and that disclosure was “insufficiently prominent.”

Some Key Trends

These recent cases, including Rogers, illustrate a few key enforcement trends under both the general misleading advertising provisions of the Act and stand-alone performance claims provision. These include increased scrutiny of price claims, performance claims, fine print disclaimers and the “general impression” of advertisements. While none of these issues is new, they have been brought to the forefront by several important decisions (including by the Supreme Court of Canada) and some heightened enforcement efforts (including some sectoral developments, for example in the cell phone and airline industries).

For example, in one speech late last year, the Commissioner of Competition said that companies should not “mislead the public by hiding charges or conditions in fine print” or by “making claims you can’t back up”. Representatives from the Fair Business Practices Branch of the Bureau have similarly highlighted the review of fine print disclaimers and the general impression of advertising as priorities in other recent public statements.

The Bureau has also indicated that the misleading advertising provisions of the Act apply equally to new technologies, including emerging advertising technologies, such as geo fencing, and mobile devices. For example, in recent remarks, the Bureau emphasized that reviewing the general impression of an advertisement as a whole was “especially important when developing advertisements that can be viewed on mobile devices.” Having said that, the Bureau’s 2003 Internet advertising guidelines (Application of the Competition Act to Representations on the Internet), which remain its leading statement on advertising on the Internet, have not been significantly updated to reflect many new changes in technology impacting the advertising industry.

Of course, as some observers have quite correctly pointed out, such cautions by the Bureau of the kind described above, while intuitively obvious, can be very difficult to practically apply in some cases, such as claims in relation to products with complex pricing. Other potentially challenging situations include promotional claims for products with complex technical features, products marketed in multiple markets or how to effectively disclose key terms when using new and emerging media (e.g., social media, mobile devices, etc.).

As a practical matter, advertising law is also highly contextual and subjective, with Canadian courts having taken divergent approaches to a number of similar questions (the recent Richard v. Time decision and interpretation of the “average consumer” standard, which differs from a number of cases previously decided under the Act, being one recent noteworthy example).

Some Best Practices

Given some of the recent misleading advertising trends and developments discussed above, some best practices for companies and marketing agencies include:

Validate performance claims. Take extra care to validate performance claims, ensuring that the data relied upon is both relevant to and substantiates claims (including where claims are made in different markets).

General impression. Take extra care to review the overall general impression and context of advertising copy, including imagery and the connection between primary claims and any disclaimers used. In particular, consider whether “banner” or “headline” claims can stand alone and are misleading.

Agencies and general counsel. Do not assume that external agencies or general counsel will catch potential issues or appreciate some of the potential nuances of proposed advertising.

New media and mobile devices. Review media campaigns involving new media or mobile devices to consider whether disclosure of key aspects – for example, price, performance and material conditions or limitations – is likely to be adequate and effective.

Overly technical or “legalistic” advertisements. Recent developments have shown that there is risk associated with advertising claims and disclaimers that are overly technical, include legal or technical jargon or that are overly legalistic.

Assuming that most consumers are reasonably sophisticated. In light of the recent Richard v. Time case, it cannot be assumed that Canadian courts will be generous when interpreting the appropriate standard of consumer in evaluating whether an advertising claim is material or for the “general impression” test under the Act or provincial consumer protection legislation. As such, companies that wish to reduce risk may wish to adopt a more “lower common denominator” test until the effect of the Time case on courts interpreting the Act is clearer.